Four reasons transactions fail to complete
The real estate transaction is complicated with many moving parts and players. Anywhere along the process, it can fall apart. Below are four reasons transactions fail to complete. There are others I know, but these seem to occur the most often.
Loan not approved
Don’t know what happens with some lenders; they just don’t do the upfront work necessary. The loan originator will retrieve the borrower’s FICO score without any verification of income or monthly expenses and boom the borrower is approved. I realize it costs the lender money to process the loan application, but failure may result in tears. I had had occasions when the loan originator assured me the clients were approved only to be declined the week before closing-UGH! Unfortunately more than a single occurrence. If you are a borrower wanting to purchase a home, please ask your lender to process the file through underwriting to get conditional approval.
Now, you borrowers, please be honest with your lender. Don’t gild-the-lily when it comes to your income and expenses. Anything negative needs explanation at the time of the application. Loan approvals are difficult, be kind to your loan officer and don’t blindside them because you’re too embarrassed to disclose. It will show up somewhere in the process, usually at final underwriting after you have already packed. Importantly, make sure your loan officer and processor hears you.
Cancellation of a contract due to a declined loan should be rare if the lender performs and the borrower provides all necessary disclosures and documents.
An appraisal below purchase price is the one area where greed can be displayed. Particularly, in a competitive market when “for sale” properties receive multiple offers.
Accepted offer over asking
Buyers will offer over asking pricing in hopes of winning the bid. Some buyer’s and unfortunately, agents as well, hope that the appraisal will save them from their win-at-any-cost behavior. Remember, the appraisal is for the benefit of the buyer’s lender and strictly a contract between the borrower and their lender. The seller only cares that the transaction closes. So the appraisal comes at below purchase price, and the buyer immediately believes the seller has to come down to meet appraisal results. NOT SO. The seller can, but not required. There is a ratified contract, and the appraisal is one of the contingencies that provides for the buyer to cancel without penalty. The buyer will either need to perform meeting their lender’s down payment requirements or renegotiate purchase price with the seller. Sellers have this habit of believing that if a buyer offers a certain price, they should be willing to fulfill the agreement; if it were only that simple. The sellers can stick to the original terms and not budge or compromise. If the former, chances are the transaction will crumble. I have seen this happen.
It is my contention that the listing agent should negotiate at the time of the offer if there is a concern about results of the appraisal.
Appraisal below list price
Then there is the situation when a buyer offers listing price, and the appraisal comes in below. The buyer acted in good-faith, and I would hope that the seller would be flexible and renegotiate the purchase price. As stated above, the seller is not obligated to do so, and if he chooses not to then the transaction will befall negative results. In this situation the seller’s options are; renegotiate, hope for a cash buyer to come along, hope for a more favorable appraisal on the next accepted offer. Sellers, don’t be greedy, renegotiate.
I find this reason to be the most preventable but seldom is.
If buyers and their agents would be realistic at what they are viewing when judging a home any offer they make would reflect condition as they see it. Of course, sellers always think their home is in better condition than reality. Routine maintenance gets neglected. My longtime home inspector says “I don’t find problems, I discover deferred maintenance.”
The majority of the time, inspections are contracted by the buyers with results coming in about half through the transaction, sometimes with a surprise. Surprises are not a good thing at this juncture. However, if the seller were to perform inspections before listing the home and disclose findings would this not eliminate most surprises? I think it would.
I now suggest to my sellers that they have the home, pest, roof, HVAC, and sewer lines inspected. Necessary repairs performed, and if not, the asking price should reflect condition. Yea, this would be an extra cost to the seller, but it could mitigate inspections as a contingency and may result in a higher offer price if the buyer thinks they are getting a reliable product. The buyer could still hire inspectors, but chances are they will not and rely on seller provided reports. All principles are looking to make or save money.
Family and friends
This one is the most frustrating and can be prevalent throughout the entire process. One such event happened to me long ago when everything that was selling was either a short sale or foreclosure.
A buyer was in contract with a seller whose property was being short sold. The property was scheduled to close the week before Labor Day. The seller relayed through their agent that he will not close until after Labor Day as his moving help was not available until then. A friend of my client started jawing to her that the seller had to be out on the scheduled close date and anything else was unacceptable. It didn’t matter what I said and knew. The seller stated “I won’t sign,” it is a short sale, so he didn’t care if it closed or not. The client told me in no uncertain terms the seller’s agent, and I had to make him move. The seller didn’t move out or sign that week. It could have fallen apart, but we did close the week after Labor Day. Because of a friend getting her in knots unfortunately to this day we are not on speaking terms.
I wish I understood the rationale where the opinion (not knowledge) of a family member or friend is more valuable than that of a broker or agent. These are individuals who work in the industry every day. If the friend or family member is a real estate lawyer, I would probably defer, but short of that having sold or purchased a home at some time in your life does not make you an expert.
If you want a friend or family member to have a decision making-role, do so at the first broker/agent meeting and not after an accepted offer.
With planning and open dialogue, these four reasons transactions fail to complete, can be somewhat mitigated.
Photo courtesy of Pixabay Moritz320